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Tensions heighten following control board rejection of fiscal plan

By on March 9, 2017

SAN JUAN – As Gov. Ricardo Rosselló told the press Thursday he would go all the way to defend his fiscal plan, the fiscal control board notified him through a letter that the proposal presented by his administration did not meet the requirements established by the federal Promesa law.

In a letter to the governor, the island’s financial management board said the proposed plan was based on “unrealistic” revenue and savings projections, while recommending a three-year timeframe to balance the budget, tied to greater cuts. It grants the government until Saturday, March 11, at 9 a.m. to submit a revised document.

Moments after learning about the letter, the governor’s representative to the board, Elías Sánchez, appeared before the media to explain that they will use the deadline provided to demonstrate that the methodology being used by the board is incorrect and that the fiscal gap it identified is not real as it includes spending that does not exist.

However, he assured the administration will adjust the document to the board’s new parameter of having three years to achieve a balanced budget.

“They changed the rules of the game; extended the deadline [to balance the budget] but with more severe cuts, all based on a methodology that is not correct,” said Sánchez, who again called for dialogue with the board.

(Juan J. Rodríguez/CB)

The governor’s representative to the board, Elías Sánchez (Juan J. Rodríguez/CB)

During a press conference with Treasury Secretary Raúl Maldonado, Chief of Staff William Villafañe, Planning Board President María Gordillo and Conway MacKenzie staff, Sánchez broke down the contents of the letter and argued why the board and its Ernst & Young advisers are using inaccurate projections.

He assured the board is not taking into account the cuts that have been made so far, such as $115 million in savings in just two months through reductions to professional services contracts.

Regarding the board’s concerns about revenue, the Treasury secretary said these were made with systems and models provided by the U.S. Treasury. “We have basis and evidence” for the numbers presented by the government, the official emphasized.

Once again, the Rosselló administration called for the need to appeal to reason and asked to meet as soon as possible to settle the differences before the Monday deadline to certify a plan. However, it admitted that at the moment, no response to their request has been received. If the board insists on the changes it proposes to the fiscal plan “and on an artificial fiscal gap, the consequences will fall on them,” Sánchez said.

Further cuts requests

In the letter, a copy of which was leaked to the press but the board did not make public, it says that the fiscal plan presented by the Rosselló administration on Feb. 28 is on the right path to reform the island’s pension systems; reduce spending, among which the University of Puerto Rico and munci stands out; and toward compliance with fiscal obligations.

However, the board raises red flags about the overly optimistic projections presented by the government including economic growth of minus-1.6 for fiscal year 2017 and the impact of the proposed fiscal measures. It is also concerned that the central government’s spending is underestimated. It argues that projected tax revenue is too aggressive and does not provide specific details to validate the projection.

Despite assuring it understands the difficulty in implementing a $300 million cut to the UPR for fiscal year 2019, in its letter the entity says the magnitude of the deficit requires the number raised to $450 million by fiscal year 2021.

With regard to pensions, it insists that the adjustment should be of at least 10% to prevent other sectors from assuming a greater burden as a result of the insolvency of pension plans. If the retirement system runs out of money at the end of the year, general fund money would have to compensate for the shortfall, which would mean fewer resources available to cover other essential services such as education and the healthcare system. The board calls for further cuts to pension benefits and for the government to demonstrate that it is segregating the contributions of public employees so as to ensure the money is not misused.

Regarding the cost of the healthcare system, it raises doubts about how the government will achieve the reductions in spending projected in this area, which are less than the $1 billion it recommended at the beginning of the year. It also believes it is not the time to increase public health plan coverage – as suggested by Rosselló – and requires the government to set a cap per member on the benefits received each month. According to the board, this will help control hospital visits and the cost of medications.

The governing body also proposes that government payroll be cut more, to $1.3 billion by 2021, by which date there should be a balanced budget, while establishing that the government must implement reforms to achieve three main objectives: short-term liquidity, structural balance in the medium term and long-term economic development.

In its letter, the board reminds its request this week that the government reduce work hours, Christmas bonuses and government hiring.

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